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Where do we go from here? New year's Reflections Pertaining to Baltic Economic Doldrums

I submit a set of reflections that came about because of two events. One was an economic roundtable arranged by the Office of the European Parliament in Riga that I had the privilege of speaking at in November. I had been asked to elaborate on the idea that the reemergence of the Baltic States onto the world market in the early nineties was something that had not been planned with much reason, but fell into our lap instead with little reflection and prior preparation. A free market improvisation, if you will, constructed initially on the basis of the "one book by Milton Friedman" that Mart Laar had read as he assumed the burden of leadership.
Thus, the proposition that in an economic planning and execution sense, the return to independence had to a substantial degree been a "false start", as borne out by the recent dramatic downturn in the economic fortunes of Estonia and Latvia even more than Estonia. The point being that in addition to the whole world falling off the economic cliff all at once, there are systemic deficiencies in the Baltic States that were exposed as the water receded in this "tsunami". The weaknesses in our infrastructures have been made visible - something that doesn't happen nearly as distinctly when economies are coasting happily along. Prior to the massive global economic downturn set off by the bankruptcy filing of Lehman Brothers in September of 2008, Balts had been surfing the crest of a wave of impressive growth, prosperity and consumerism that turned out to be a fata morgana in retrospect. Instead of being on the way to assume a permanent position among the five wealthiest countries of Europe, as promised by the Reform Party in its election slogans, it turned out that Estonians had been blinded by a bubble instead - one fueled by lending on the part of Scandinavian banks often bordering on the irresponsible, and also by a real estate boom with a gradual buildup, followed by overheating, and brought to an end by an unsettling implosion. Now we stand once again, almost as in 1991, in a manner that can be likened to that of an escaped prisoner from the Gulag, blinking his eyes in the bright sunlight of the taiga, trying to figure out what happens next. The other impetus for ref-lecting on what the future holds in our neck of the woods was an e-mail ex-change with Toomas Sõrra on the East Coast and investment portfolio manager Steve Tael in San Diego, with emphasis on what might be called "comparative Eastern Europe".

Poland in comparison to the Baltic Region One country we were looking at for comparison was Poland, which seems to exist in another world, barely hurting, if at all. Poland was a Warsaw Pact satellite and never fully a Soviet-occupied country, at least not after the war. Poland may have been stunted by her experience, but not dragged as dramatically backwards as we were. Neither can our economies of scale be compared, Poland having substantial manufacturing etc. She is almost "bolted" onto Germany with autobahns and railways functioning like a circulatory system. Although Estonia is coupled to Finland and Scandinavia trade-wise (unlike Latvia, who trades more with Lithuania and Eastern Europe) we don't have the "placenta effect" that Poland enjoys with Germany. Neither do the Poles have to worry about culture or language extinction, and Polish defense capability is a fairly substantial one.

The Baltic Corner is Unique The Baltic States are in a little economic corner of their own. It is extraordinarily and specifically small, without many of the industrial attributes of larger countries and regions. Barely large enough to be viable as a country, Estonia is often hamstrung by the "short bench" effect, meaning a limited pool of specialists. The fact that reverse gear was recently unexpectedly engaged while moving forward is not all bad. I like the humbler and more introspective Balts better than the big spenders of just a few years ago. Having cast off the Soviet yoke, we often differ less from Russia and Belorussia than we like to think. For some time, we will remain in a transitional twilight zone, neither flesh nor fowl. Going from the top echelon of the USSR to the bottom of the EU barrel means that there is a long uphill road ahead of us. This is not intended to belittle all of the educated and industrious people we do have. Quite to the contrary, their morale and readiness to "keep on keeping on" needs to be nurtured. But it is better to have an accurate image of one's self than an unrealistic one. It was Spengler who said "optimism is cowardice", and the American POW Admiral James Stockdale who said that optimists died first in the prison camps of Vietnam. Stockdale believed in taking every day as it really was without losing faith.

We are not as hot as we like to think we are Recent formal surveys of IT standards in Europe show that talk of Estonia being an Internet usage and broadband hotshot is a myth. Estonia's performance is middling compared to those in the top of the class. For that matter, Estonia did not invent Skype, at least not as the cash cow that it is. Skype was founded by Swedish-born entrepreneur Niklas Zennström and the Dane Janus Friis, and it is they who benefit the most. Yes, Estonian programmers did write the important lines of code that make Skype function, and there is a big Skype office in Estonia, but it is Zennström and Friis that Estonians need to aspire to become. The Danish economist Morten Hansen of the Stockholm School of Economics in Riga painted an uncomfortable portrait of the Baltic nations at the panel: "You have skinny little legs, a pot belly, and not enough is happening upstairs. You guys still aren't effective enough." One of these days I must bring my essay on "Baltic uniqueness" to fruition. One dimension of that uniqueness, with the exception of the brief Golden Age of interwar independence, is our sequesteredness as a sleepy hollow. Take for example the rates that spin doctors (PR people) can charge here. The "Baltic" and specially Estonian PR tariff is one third or a quarter of that in Moscow, with rates in Stockholm and Helsinki resembling those of Moscow. The point here is not to belittle Estonia, for I hold her much too dear. The point is that there are future hurdles to cross and new levels of competency to be aspired to. Only a few other European countries are going through a patch as rough as ours, but they are spared other features of the "Baltic malaise", such as the increasingly apparent belligerence of Putin-era Russia.

Have we really had a proper development policy? To frame this properly, we are actually on the topic of devising and implementing a decent development policy or sets of policies for these three countries. To me, it seems unfortunate that our elected officials have often not presented us as three formerly independent countries who have shaken off the yoke of oppression (in contrast to the "former Soviet republics" label we tend to bear all too often). I ran unsuccessfully in the summer for a Europarliament slot partially on the premise that a crisis package is required for Latvia in particular and Estonia too. Although I am all too aware of the perils of throwing money at a problem if development aid is not apportioned responsibly, it surprises me that no one else lobbies for a one-time pint-sized Marshall Plan for the Baltic region. The hundreds of millions of citizens of the EU would barely notice the cost, and getting the pump primed in these parts might lead to a nice string of knock-on effects for Europe as a whole. But nothing will happen at all if we don't take the lead ourselves in lobbying for such a project. I would personally have preferred a wholly different track. Having been convinced of the virtues of the idea of protectionism or temporary protectionism by an Estonian friend who gave me a copy of Ha-Joon Chang's "The Bad Samaritans" to read, I remain convinced that Estonia should either never have joined the EU or ought at the very least have postponed the decision for quite some time, until she had bought some time to build up her economy. Ha-Joon Chang, who is of Korean extraction, supports the “infant industry” argument as a model for development. Infant industries often get government help when governments have the sovereign liberty to do so. Start up businesses of strategic importance need to be protected during early years from being driven out of business and from takeovers. Chang demonstrates that the US and the UK and other European nations reached prosperity only after emerging from protectionism, which they have thereafter denied developing countries, imposing demands of unconditional free trade on weaker countries in order to perpetuate their own inbuilt advantages. By now, Estonia could have slowly been becoming a featherweight, punching adeptly in her own weight class. Joining the EU has applied many regulatory governors to Baltic economic engines, denying the Balts the opportunity to implement competitive advantages they could have otherwise designed and put into practice. The Baltic peoples were led however to expect a quasi-automatic significant transfer of wealth which quite obviously has not materialized, much as the EU has also not brought almost any improvement in our security posture. To the contrary - some European "allies" of the Baltic states do not give comfort to us. When investments are made, they are often not for things that we ourselves would have prioritized as top-rung needs. Above all, there is no "bespoke" plan for the Baltic region that takes Baltic uniqueness into consideration. A country emerging from Soviet stuntedness requires a wholly different developmental approach than let's say the nicely established Benelux.

Estonia - a country that has been adrift on the continent, looking to return to her home port The economic historian Jaak Valge wrote an analysis in 2003 based on data crunching and comparative Geary-Khamis dollars analysis formally confirming that Estonia was not far behind Finland economically in 1930's. The extent to which Estonian development was held back by Moscow is difficult to overstate. Finnish per capita GDP in 2008 was 37,000 USD, Estonian GDP 21,000 USD per person, with Russian GDP per person at 16,000 USD. Once upon a time, we were located somewhere near Scandinavia, in respect to the way we identify ourselves. We have now slowly worked ourselves back up to a GDP socioeconomic locale that places us in the vicinity of Hungary or Poland, but without much of their infrastructure. Latvia is in so somber of a mood that fellow panelist Juris Kaza despairs because of massive emigration from Latvia, and speaks of a "dead decade" ahead. Latvia is saddled with so much debt that the prospect for many people to work, work and do more work to pay off a house or apartment that has lost most of its earlier value is not a very attractive one. So where do we gravitate now? Mother Russia would of course take us back, with a drubbing and a scolding. Do we make our way back beneath Finland and next to Sweden? In principle, we are part of the "Lutheran" belt that ranges from Germany in the South up to Scandinavia and over into Finland, descending into Estonia and down to Riga and Livonian country, but to reclaim our proper place within it, we have to look deep inside and fix our eyes on new and higher hurdles to clear.

How do we get out of this mess? The economics students our panel spoke to in Riga were unhappy to hear that there is no one single pat recipe for success. A whole mosaic of improvements needs to be made. For my part, I suggested that the way ahead is for as many of us as possible to become entrepreneurs. The other trick we must master is to learn what it is that buyers abroad need and want the most, and deliver it to them in a confident way. Practice, polish and skill sets are often still lacking. Certainly those of our kin who live in the West (apparently the West is still not a place that Estonia fully calls home?) might have a role to play in this? Estonians in the old country need to get inside the heads of people who live elsewhere - people with purchasing power, assuming any are left! The Chinese are currently acquiring the Volvo brand largely exactly for that: to get a better grip on how Western minds tick. Instead of engaging in simple flag-waving patriotism, brutal comparison statistics have to be looked at across the board - health, education, Internet usage, migration, etc. These will give us measurable goals to shoot for. Devising the "how" is the interesting part. The theorist Paul Good-man believed in the power of creativity: "It is by losing ourselves in inquiry, creation and craft that we become something. Civilization is a continual gift of spirit: inventions, discoveries, insight, art. We are citizens, as Socrates would have said, and we have it available as our own." In the end, it is not always things that one can buy in the store that we should be hankering for, but simply the attainment of a quality of life that the Estonians once had, but which the vagaries of fate deprived us of to a significant degree. The renaissance of society as a whole should also bring Estonia's Russians into a better income class and set of circumstances than those of their kinsmen across the border. If we manage to keep it up for a century without hiccups, might pacification not be attained through the device of good living standards? Unless we engage in a deep audit and a SWOT (strengths, weaknesses, opportunities, threats) analysis, we will have wasted the opportunities for reflection afforded by a perfectly good crisis. Many returnees of Estonian extraction have had to hear the words "ärge tulge meid õpetama" - "Don't come here to teach us". While I can appreciate the resentment caused by those who do arrive in a pontificating state of mind and with poor manners, it is high time we drop the all too prevalent Russian mentality, which regards the very idea of "win-win" with deep skepticism, if not outright rejection. There is enough work to be done by all.